There is a very interesting article over on Morningstar today. Does not require subscription to view it:
http://news.morningstar.com/articlenet/article.aspx?id=311658
In it, Christine Benz interviews Jason Zweig (who, by the way wrote the excellent commentaries after each chapter of "The Intelligent Investor).
The topic is "neuroeconomics" - "how our brains respond in real-life financial situations".
Some quotes from it:
Why people tend to buy high and sell low:
"...people feel the intensity of a loss about twice as strongly as they feel the pleasure of an equivalent gain. So losing $100 hurts 2 to 2.5 times more than winning $100 feels good."
Why money managers tend to buy high and sell low:
"There was a beautiful study that was published in the The Journal of Finance a couple of years ago about the selection of institutional money managers. It basically found that the professionals who pick money managers, in this case it was pension funds, tend to buy high and fire low. They invest in whichever managers have the best trailing three-year performance and then sell whichever have the worst trailing three-year performance. The study showed that if they had flipped their decisions--if they had bought the ones with the worst three-year performance and sold the ones with the best--they actually would have gotten better returns."
"...common sense would tell you that if you're managing money for other people, you're also risk-averse, just as they are with their own money and you are with your own. But you're averse to a different kind of risk. You're averse to the risk of looking bad to the person who's paying you a fee. And that can easily incline you to buy high and sell low. You would want the thing with the best past performance to be going into the portfolio and you would want whatever has the worst past performance to be coming out. Because in real time, at the moment of the decision, it will make you look better."
http://news.morningstar.com/articlenet/article.aspx?id=311658
In it, Christine Benz interviews Jason Zweig (who, by the way wrote the excellent commentaries after each chapter of "The Intelligent Investor).
The topic is "neuroeconomics" - "how our brains respond in real-life financial situations".
Some quotes from it:
Why people tend to buy high and sell low:
"...people feel the intensity of a loss about twice as strongly as they feel the pleasure of an equivalent gain. So losing $100 hurts 2 to 2.5 times more than winning $100 feels good."
Why money managers tend to buy high and sell low:
"There was a beautiful study that was published in the The Journal of Finance a couple of years ago about the selection of institutional money managers. It basically found that the professionals who pick money managers, in this case it was pension funds, tend to buy high and fire low. They invest in whichever managers have the best trailing three-year performance and then sell whichever have the worst trailing three-year performance. The study showed that if they had flipped their decisions--if they had bought the ones with the worst three-year performance and sold the ones with the best--they actually would have gotten better returns."
"...common sense would tell you that if you're managing money for other people, you're also risk-averse, just as they are with their own money and you are with your own. But you're averse to a different kind of risk. You're averse to the risk of looking bad to the person who's paying you a fee. And that can easily incline you to buy high and sell low. You would want the thing with the best past performance to be going into the portfolio and you would want whatever has the worst past performance to be coming out. Because in real time, at the moment of the decision, it will make you look better."
